FAQ: What is the impact of the U.S.-Chilean Free Trade Agreement?

Talking Points:

On September 3, 2003, after years of intense negotiations, President George W. Bush signed the U.S.-Chile and U.S.-Singapore Free Trade Agreements. As a result, Chile and Singapore joined Israel, Canada, Mexico, and Jordan to become the United States’ fifth and sixth free trade partners.

As the first comprehensive trade agreement between the United States and a South American country, the U.S.-Chile Free Trade Agreement is anticipated to boost bilateral trade and investment. Largely modeled after NAFTA, the Chilean accord encourages progress on the Free Trade Agreement of the Americas, which is anticipated to be completed in the near future.

Chile, the most free trade-oriented economy in South America, has negotiated several free trade agreements without U.S. involvement. In 1997 alone, Chile implemented a free trade agreement with Mercosur (the Southern Cone Common Market which includes Argentina, Brazil, Paraguay, and Uruguay), Mexico and Canada. And the EU became Chile’s largest supplier of goods in 2001, primarily due to the EU-Chile 1996 Framework Agreement, which covers political, trade and economic cooperation. The EU-Chile Association Agreement, concluded in April 2002, is projected to enhance the EU-Chile relationship even more.

In the past, the absence of a U.S.-Chile free trade agreement put U.S. companies at a competitive disadvantage. For example, in October 2001 the National Association of Manufacturers released a study on losses in American exports to Chile since 1997, the year Chile established a free trade agreement with Canada. The report indicated that U.S. companies lost $800 million a year—that’s more than $2 million a day—as a result of not being involved in that agreement. Until the U.S.-Chile accord was implemented, Canadian goods entered Chile duty-free, putting U.S. goods at a competitive disadvantage.

Until 1997, U.S. products were highly competitive in Chile and captured a growing share of Chile’s import market. However, after 1997, the U.S. share of Chile’s import market suddenly began to decline. In fact, according to the National Association of Manufacturers, it dropped from 24 percent to approximately 18 percent. This loss did not occur in other Latin American markets. In many ways, the U.S.-Chile trade agreement will level the playing field.

In the words of former U.S. Trade Representative Robert Zoellick, the U.S.-Chile accord “not only slashes tariffs, it reduces barriers to services, protects leading-edge intellectual property, keeps pace with new technologies, ensures regulatory transparency and provides effective labor and environmental enforcement.” Upon implementation of the U.S.-Chile Free Trade Agreement, more than 85 percent of bilateral trade in consumer and industrial products became tariff free. This includes agricultural and construction equipment, autos and parts, computers and other information technology, medical equipment and paper products, according to the USTR. Additionally, more than three-quarters of U.S. farm goods will enter Chile duty free within four years, while all remaining tariffs will be phased out within 12 years.

Under the free trade agreement, greater access is expected for U.S. professionals, banks and insurance, telecommunications, securities and express delivery companies. Greater protection will be accorded to U.S. digital products, such as software, music, text and videos. Plus, protection of U.S. patents and trade secrets will surpass all previous agreements. Overall, the deal will establish a secure and more predictable legal framework for U.S. investors operating in Chile, according to USTR.

Chile is one of Latin America’s most dynamic markets. Although its population is only 15 million and its economy is roughly 1.5 percent the size of the U.S. economy, Chile is considered one of the region’s most promising markets. A study published by the University of Michigan and Tufts University estimates that the U.S.-Chile trade agreement will expand U.S. GDP by $4.2 billion and Chilean GDP by $700 million annually.

FAQ: What is the expectation of the Dominican Republic-Central American Free Trade Agreement?

Talking Points:

The primary goal of the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) is to eliminate barriers to trade in goods, agriculture, services and investment between the United States and the Dominican Republic, Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua. DR-CAFTA is anticipated to give U.S. exporters and investors greater access to Central American markets, strengthen North-South ties, promote the rule of law in the region and foster economic growth there by granting the DR-CAFTA countries preferential access to U.S. markets.

In January 2003, when DR-CAFTA negotiations began, it was estimated that an agreement would be reached by December 2003, with a vote in Congress soon afterward. This did not occur. Sticking points involving agriculture (especially sugar), textiles, telecommunications, insurance and intellectual property protection proved difficult to remedy. Nevertheless, negotiations were completed. Greater difficulties, however, occurred in Washington, D.C.

On June 30, 2005, the Senate passed DR-CAFTA by a vote of 54 to 45. And after final deal making, the House vote came to an end a few minutes after midnight on July 28, 2005. The result: 217 to 215 in favor of passage.

As repeated throughout this book, free trade issues are receiving a great deal of negative attention in Washington and in many Congressional districts. The most controversial issues stem from the loss of U.S. manufacturing jobs. In the end, CAFTA became a lightning rod for those unhappy with U.S. economic conditions. This has, to some extent, overshadowed the advantages DR-CAFTA brings.

For example, more than 20 Central American trade agreements—without U.S. involvement—have granted preferences to products from Mexico, Canada, Chile and several other nations. This has put U.S. exporters at a competitive disadvantage. U.S. apple growers, for instance, shipped nearly $4 million worth of apples to Costa Rica in 2002. To the disadvantage of these U.S. exporters, Costa Rica applied a 15 percent import tariff, while Canadian apples imported by Costa Rica entered duty free.

Prior to the implementation of the DR-CAFTA accord, the U.S. weighted average tariff rate on DR-CAFTA countries was 2.6 percent, according to the World Bank. This reflected the fact that approximately 80 percent of DR-CAFTA imports already entered the United States duty free. On the other hand, the weighted average tariff rate on U.S. goods was 10.1. percent in the Dominican Republic, 5.8 percent in Costa Rica, 6.1 percent in El Salvador, 5.8 percent in Guatemala, 7.3 percent in Honduras, and 2.3 percent in Nicaragua, the World Bank says. Under the agreement, DR-CAFTA countries will immediately eliminate 80 percent of their tariffs on U.S. goods and the remainder will be phased out over 10 years, according to the U.S. Trade Representative.

By reducing tariffs on U.S. goods and services, DR-CAFTA will level the playing field for U.S. firms and accelerate U.S. exports to the region. In addition, many U.S. textile producers believe the accord will boost DR-CAFTA apparel output. Why? DR-CAFTA countries typically utilize U.S.-produced cotton and textiles; Asian apparel producers generally do not. Plus, many U.S. policymakers hope the accord will act as a stepping stone to the creation of the Free Trade Area of the Americas.

The DR-CAFTA countries also will benefit in several ways. In addition to enhanced access to U.S. markets, the accord will strengthen and help stabilize the region. In turn, U.S. direct investment is likely to rise, satisfying a strong demand for capital there. Plus, the agreement supports democracy and economic reform—all factors that lead to higher standards of living.

In 2004, the United States exported $15.7 billion in goods to DR-CAFTA countries. This is more than all U.S. goods exported to Eastern Europe, plus Austria, Denmark and Finland. For many U.S. firms both small and large, expanding into DR-CAFTA markets is very advantageous.

This section appeared in Part III: Frequently Asked Questions and Talking Points of the book Grasping Globalization: Its Impact and Your Corporate Response, 2005.
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the ManzellaReport.com, is a world-recognized speaker, author of several books, and a nationally syndicated columnist on global business, emerging risks and economic trends. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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